realmidterm2solution07

realmidterm2solution07 - Real Estate Finance &...

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Unformatted text preview: Real Estate Finance & Investments, Midterm Exam Solutions Name: ID#: There are two parts to this exam. Financial calculator and 1 page (front/back) notes are permitted. Part I: Multiple Choice (12 Questions, 5 points each) Select the best alternative answer in your judgement, based on what was taught in lectures, the lecture notes, and the homework assignments. Clearly indicate your selection by lling in the appropriate circle on the answer sheet. If your selection is not clear, no points will be awarded. Read each question carefully before answering. Please make sure that you wrote your name on the scantron . Consider a $10,000,000, 8%, 30-year amortization mortgage with constant annual payments (CPM) and a 10-year maturity with balloon. The borrower is prohibited from prepaying its mortgage, but is permitted to execute a collateral defeasance. The borrower decides to defease the loan at the end of year 8. The treasury yields at the end of year 8 are as follows: 1 month: 3% 3 months: 3.5% 6 months: 3.7% 1 year: 4% 2 years: 4.2% 3 years: 4.3% 5 years: 4.5% Please answer questions 1 and 2 accordingly. 1. Which of the following is false about this mortgage? (a) Annual payments are $888,274. (b) The balloon payment is scheduled to be $8,721,208. (c) Outstanding loan balance at the end of year 8 is $8,524,678. (d) The loan amortization in the rst year is $88,274. (e) CPM is easy to budget due to xed debt service payments (except the balloon payment). 1 Solution: $10 ! 000 ! 000 = "#$ % 08 1 ! 1 1 % 08 30 ! "#$ = $888 ! 274 &#( 1 = $888 ! 274 ! $800 ! 000 = $88 ! 274 )&**+ = $888 ! 274 % 08 1 ! 1 1 + 0 % 08 20 ! = $8 ! 721 ! 208 ,-) 8 = $888 ! 274 % 08 1 ! 1 1 + 0 % 08 22 ! = $9 ! 061 ! 058 2. How much defeasance premium will the borrower pay? (a) zero (b) $321,742 (c) $467,212 (d) $546,897 (e) $643,484 Solution: (a) OLB at the end of year 8 is: ,-) 8 = $888 ! 274 % 08 1 ! 1 1 + 0 % 08 22 ! = $9 ! 061 ! 058 The securities cost (to replace the collateral): ./01(2$2/3 = $888 ! 274 1 % 04 + $888 ! 274 + $8 ! 721 ! 208 1 % 042 2 = $9 ! 704 ! 544 The defeasance premium is: Pr /#21# = $9 ! 704 ! 544 ! $9 ! 061 ! 058 = $643 ! 484 3. In a mortgage, "exculpatory clause": 2 (a) Excuses borrower from liability other than loss of collateral property. (b) Allows lender to make entire loan balance due and payable immedi- ately. (c) Allows borrower to pay o ! prior to maturity. (d) Allows lender to pursue borrower personally. (e) Makes a loan "recourse". 4. REITs can be modeled as "closed-end mutual funds". What would be the implication of this approach on the pricing of REITs? (a) REIT is just a collection of assets with an added layer of management....
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This test prep was uploaded on 02/18/2008 for the course FBE 391 taught by Professor Tuzel during the Spring '07 term at USC.

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realmidterm2solution07 - Real Estate Finance &...

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